2009 Investment Climate Statement - Panama

2009 Investment Climate Statement

Bureau of Economic, Energy and Business Affairs

February 2009

Report

Openness to Foreign Investment

The Government of Panama (GOP) maintains a liberal regime for foreign investment and investment in financial instruments while with cooperation from the Panamanian business community, actively encourages foreign direct investment (FDI).

Laws in general make no distinction between domestic and foreign companies. In 1998, the GOP enacted the Investment Stability Law, which, among other things, guarantees foreign investors, who invest at least two million dollars in Panama, equal treatment under the law to that of their domestic competition. Under Law 41 of 2007, Panama has already encouraged multinational companies to open regional headquarters in Panama by offering various tax incentives. While Panamanian courts generally uphold the sanctity of contracts, there have been various allegations of corruption within the judicial system.

The United States and Panama successfully concluded negotiations of a free trade agreement in December 2006, and the re-named “Trade Promotion Agreement” (TPA) was signed on June 28, 2007. The Panamanian National Assembly ratified the TPA on July 11, 2007, and the pact currently awaits Presidential submission to the U.S. Congress for ratification.

A bilateral TPA with Panama would be a natural extension of an already largely open trade and investment relationship. Panama is unique in Latin America in that it is predominantly a services-based economy. Services represent about 80 percent of Panama’s gross domestic product. The agreement will provide new economic opportunities for U.S. exporters, particularly for agricultural products, passenger vehicles and certain machinery which currently face high tariff rates. The TPA would enhance trade remedies, increase transparency in government procurements, strengthen intellectual property rights protection, and provide for commitments to adhere to and enforce certain protections for workers and the environment.

The Panamanian Vice Ministry of Foreign Trade is the principal entity responsible for promoting foreign investment. It provides investors with information, expedites specific projects, leads investment-seeking missions abroad, and supports foreign investment missions to Panama. However, depending on the character of the planned investment, several different governmental entities may have a passive or active interest in the investment in terms of setting its parameters of operation, particularly within relevant regulations, land use, employment, special investment incentives, business licensing, etc. There is no formal investment screening by the GOP, although the government does monitor large foreign investments.

The GOP does impose some limitations on foreign ownership, such as in the retail and media sectors where ownership must be Panamanian. Foreign retailers, however, have been able to work within the confines of Panamanian law primarily through franchise arrangements. Currently approximately 55 professions are reserved for Panamanian nationals only. In particular, medical practitioners, lawyers, accountants, and custom brokers, are currently reserved for Panamanian citizens. The GOP also requires foreigners in various sectors to obtain explicit permission to work, but the Embassy has not received reports of such restrictions hindering U.S. firms operating in Panama. Once ratified and implemented, the TPA will accord substantial market access to Panama’s retail sector and across its entire services regimes, subject to certain exceptions.

There is no de jure discrimination against U.S. or other foreign investors in most sectors. Panama, however, imposes visa requirements to limit the immigration of citizens from approximately 80 countries. A domestic investment protection law was enacted in 1991 and remains in force; however, it has not yet been invoked or used in contravention of U.S. investment. There is a constitutional prohibition against foreign land ownership within ten kilometers of the national border or on an island. Neither Panamanian citizens nor foreigners may own beaches or the shores of rivers or lakes. Law 2 of 2006 fosters tourism investment on islands, beachfront and government properties through a concession, requiring projects to have an environmental impact study, financial support and bonds, as well as other requirements.

Builders and investors may rent such lands for 40 years, via the Ministry of Economy and Finance, extendable for an additional period of 30 years. When there is a major investment with potential job creation, Law 2 expands this period for up to 90 years.

Unclear or non-existent land titling continues to be a challenge for foreign investors. Only approximately one-third of Panama is titled property. Outside of Panama City and a few selected areas, there is no regularized land titling system or method for resolving outdated rights of possessions. Title related disputes, whether involving Panamanians or foreign investors, are common. The Embassy is aware of several cases where American citizens have had their real estate title contested. The Embassy has received reports of alleged schemes to defraud foreign real estate buyers. Law 2 of 2006 clarified ownership rights for Panamanian coastal and island properties. Law 2 confirmed the validity of existing “Rights of Possession” (ROP) ownership rights (a concept similar to squatter’s rights) and established a process to convert ROP to a title (similar to a property title deed). The underlying regulations remain in draft form and some are concerned that indigenous holders of ROPs may be financially unable to convert their ROPs to titles. Under Law 2, those not in possession of ROPs for island property must now obtain a concession from the GOP to continue occupying such property. Some U.S. investors find themselves having to defend their acquired ROP properties against competing claims of previous title and/or spurious claims asserted by other parties. The Panamanian courts are slow and at times arbitrary in resolving property disputes. The GOP is increasingly focused on addressing the institutional weaknesses underlying many of these disputes.

Panama's privatization framework law does not distinguish between foreign and domestic investor participation in prospective privatizations. The law calls for pre-screening of potential investors or bidders in certain cases to establish technical viability, but nationality and Panamanian participation are not criteria.

Panama has experienced a boom in FDI which began as a result of GOP privatization and modernization efforts in the mid-1990s. Foreigners, including U.S. firms, participated actively and successfully in the privatizations of ports, electrical generation, and telecommunications firms. The conduct of major public bids and tenders for some public sector projects, especially under prior governments, raised concerns about the openness and transparency of the process and the responsiveness of authorities to participants. U.S. companies complained that some bidding processes lacked transparency.

Following the privatizations of the late 1990s, Panama's FDI dropped to only $98.6 million in 2002, primarily as a result of losses by major banks and the drop-off in privatizations. However, FDI rebounded dramatically to nearly $800 million in 2003 and over $1 billion in 2004 and 2005 as a result of major investments in port expansions, the Colon Free Zone, residential and commercial construction, the sale of shares of a telecommunication company, dividends from the electrical companies, as well as a resurgence of the banking sector. In 2006, FDI doubled to approximately $2.5 billion on the strength of the approximately $1.77 billion acquisition of Panamanian bank Grupo Banistmo by HSBC during the fourth quarter of 2006. For 2007, FDI was $1.8 billion, led by investments in the banking sector and the Colon Fee Zone. There are various announced FDI-funded projects in the energy sector, golf courses, residential and commercial construction. However, many of these projects may be affected by unavailability of financing due to the current global financial crisis.

The GOP has "corporatized" Tocumen International Airport as a private entity, with all shares owned by the GOP. The airport has finalized a $70 million expansion of the passenger and cargo terminals. The airport is now undergoing a $90 million infrastructure expansion program. Historically, the GOP pledged not to privatize its inefficient water and sewage utility, its electric transmission company, “Atlapa” (Panama’s primary convention center and the largest such facility in Central America), or the Caja de Seguro Social (Social Security System).

On October 22, 2006, Panamanians voted by a margin of 78% to 22% to approve a $5.25 billion project to expand the Panama Canal by constructing a new third set of locks, along with new access navigational channels and deepening the existing navigational channels and the depth of Gatun Lake. Construction began in September 2007 and will continue through 2014. The project will be financed through Canal revenues and $2.3 billion in debt financing for multi-lateral financial institutions. Given the size of the project and the Panama Canal Authority’s announced policies, foreign companies are able to bid on such contracts on the same terms and conditions as Panamanian companies.

The GOP developed some of the U.S. government properties transferred to Panama by the United States from 1979 through December 1999. The commuter airport development at the former Albrook Airfield, now known as Marcos A. Gelabert Airport, has been one of the most successful ventures. Other projects now underway include major tourist projects at the former Fort Amador, as well as a biodiversity museum designed by world-renowned architect Frank Ghery. In December 2005, the luxury resort, Playa Bonita, was completed in the Farfan area on the Pacific coast. On the former Howard Air Base, Dell Corporation opened a customer service call center in August 2003 that employs about 2,000 people. In 2006, the GOP announced a $405 million project led by London & Regional to develop a commercial/residential complex on the same air base. Progress in the academic and research community (City of Knowledge) continues and prominent NGOs, International Organizations, Universities, and private firms are located there. Pursuant to Law 6 of 1999, the GOP offers a variety of incentives to entities operating within the City of Knowledge.

Panamanian Law 22 of 2006 regulates government procurement and other related issues. Law 22 was intended to streamline and modernize Panama’s contracting system. It establishes, among other things, an Internet-based procurement system (www.panamacompra.gob.pa) and requires publication of all proposed government purchases, except the Panama Canal Authority and the Social Security System, which have their own Internet based procurement systems. National Security based contracts are exempted from the system. The Panamacompra program requires publication of all government purchases on the Internet; evaluation of proposals and monitoring of the procurement process; consultation of public bids, including technical specifications and tender documents; classification of purchases by different government institutions and gathering and analysis of data. The law also created an administrative court to handle all public contracting disputes. The rulings of this administrative court are subject to review by the Panamanian Supreme Court. The GOP has generally handled bids in a transparent manner, although occasionally foreign companies have complained that certain procedures have not been followed.

While Panama committed to become a party to the World Trade Organization (WTO) Government Procurement Agreement (GPA) at the time of its WTO accession, it remains an observer and not a signatory. Its efforts to accede to the GPA have stalled. Under the TPA, Panama would guarantee a fair and transparent process for procurement covered by the TPA. The TPA provides that U.S. suppliers will be permitted to bid on procurement by a wide range of GOP entities, including the Panama Canal Authority, over a certain threshold amounts on the same basis as Panamanian suppliers. The TPA would strengthen rule of law and fight corruption by criminalizing bribery in government procurements and establishing at least one impartial administrative or judicial authority to receive and review supplier challenges. Disputes relating to Panama Canal Authority procurement will continue to be addressed through the authority’s existing procedures.

Currently, importing entities are required to hold a commercial or industrial license to operate in Panama, which license can be obtained through Panama’s online business registration service (www.panamaemprende.gob.pa). Importing entities are not required to have a separate import license, with the exception of certain controlled products such as weapons, medicine, pharmaceutical products and certain chemicals.

Conversion and Transfer Policies

Panama has no legal restrictions on the transfer abroad of funds associated with or capital employed in an investment. There are no restrictions on capital outflows or convertibility. Panama uses the U.S. dollar as legal tender. Currency conversion therefore is not an issue.

There is, therefore, no independent monetary policy in Panama, as Panama uses the U.S. dollar for its currency and has Central Bank. Inflation, has until recently been low and predictable. While Panama’s annual inflation averaged less than 3.2% over the preceding 30 years, inflation has increased to an annual rate of 6.8% as the end of December 2008.

Expropriation and Compensation

While Panamanian law recognizes the concept of eminent domain, the Embassy is unaware of any outright expropriation of property by the Panamanian government in recent years.

Dispute Settlement

Panama has a court and judicial system built around a civil code, rather than the Anglo-American system of reliance upon case law and judicial precedent. Fundamental procedural rights in civil cases are broadly similar to those available in U.S. civil courts, although some notice and discovery rights, particularly in administrative matters, may be less extensive than in the U.S. Judicial pleadings are not always a matter of public record, nor are the processes always transparent.

The business community lacks confidence in the Panamanian judicial system as an objective, independent arbiter in legal or commercial disputes, especially when the case involves powerful local figures with political influence. Over the last few years, the majority of investment disputes involving U.S. investors has been related to land purchasing and/or titling issues. Such disputes have been difficult to resolve due to the lack of adequate titling, inconsistent regulations, lack of trained officials outside of Panama City, and a slow and cumbersome judiciary. Some of these disputes have resulted from U.S. investors being unfamiliar with the Panamanian titling system. The court system is slow and prone to massive case backlogs and corruption. The GOP and the newly installed President of Panama’s Supreme Court have signaled their intentions of strengthening their institutions to address these issues by, for example, digitizing court records and providing access to them on-line.

Panama’s commercial law is comprehensive and well-established. Its bankruptcy law is antiquated and remains under review to be adapted to modern business practices.

The GOP accepts binding international arbitration of disputes with foreign investors. Panama became a member of the International Center for the Settlement of Investment Disputes (ICSID) in 1996. The United States and Panama signed an amendment to the Bilateral Investment Treaty to incorporate Panama's membership into ICSID on June 1, 2000. This amendment took effect in May 2001. Panama also became a member of the World Bank's Multilateral Investment Guarantee Agency (MIGA) in 1997.

Once ratified and implemented, the TPA will solidify the legal framework for U.S. investors operating in Panama. All forms of investment will be protected under the agreement, including enterprises, debt, concessions and similar contracts, and intellectual property. With very few exceptions, U.S. investors will be treated as well as Panamanian investors (or investors of any other country) in the establishment, acquisition, and operation of investments in Panama. The TPA draws from U.S. legal principles and practices to provide U.S. investors in Panama substantive and procedural protections that foreign investors currently enjoy under the U.S. legal system. The TPA’s investor protections are backed by a transparent, binding international arbitration mechanism, under which investors may, at their own initiative, bring claims against a government for an alleged breach of the TPA’s investment chapter. Submissions to investor-state arbitral tribunals would be made public, and hearings would generally be open to the public. Tribunals would also be authorized to accept amicus submissions from non-disputing parties.

Performance Requirements and Incentives

There are no legal performance requirements such as minimum export percentages, significant local requirements of local equity interest, or mandatory technology transfer. There are no established general requirements that foreign investors invest in local companies, purchase goods or services from local vendors or invest in R&D or other facilities. There are special tax and other incentives for manufacturers to locate in an export-processing zone (EPZ), which include call centers.

Official support for investment and business activity is especially strong for the Colon Free Zone (CFZ), the banking sector, the tourism sector, and EPZs. Companies in the CFZ pay no income taxes. Banks and individuals in Panama pay no tax on interest or other income earned outside Panama. No taxes are withheld on savings or fixed time deposits in Panama. Individual depositors do not pay taxes on time deposits. EPZs offer tax-free status, special immigration privileges, and license and customs exemptions to manufacturers who locate there. Investment incentives offered by the GOP are available equally to Panamanian and foreign investors. The incentives do not discriminate or distinguish between Panamanians and foreign investors.

Law 8 of 1994 offers tax and other incentives to investors in tourist industries. As part of the Torrijos Administration’s review of all fiscal incentive programs, the GOP has decided to eliminate certain incentives contained in Law 8. The GOP has discussed removing the incentives granted to investments in new casinos, shopping malls, and night clubs. The GOP expects to maintain the incentives related to residential projects, such as hotels, apartment-hotels, hostels and time shares.

In 1997, the Panamanian government enacted legislation to promote the restoration of historical buildings and sites in Panama City's old downtown area known as "Casco Viejo." Tourism incentive laws provide, among other measures, tax exemptions for vehicles and other designated goods imported for use in, or to build infrastructure for, the tourist sector. Similar incentives exist for the mining sector. Law 28 of 1995 extended national industry and export incentives. However, contracts that were created prior to Law 28 continue to receive the benefits of the previous incentives. In 1997, the GOP eliminated tariffs on fuel imported by electricity generators to promote privatization of the former state electric company. The government has gradually phased out tariff incentives that favor the importation of raw materials for further processing in Panama.

Right to Private Ownership and Establishment

With the current exception of retail trade, the media, and several professions, foreign and domestic entities have the right to establish, own, and dispose of business interests in virtually all forms of remunerative enterprise. Foreigners need not be legally resident or physically present in Panama to establish corporations or to obtain local operating licenses for a foreign corporation. Business visas (and even citizenship) are readily obtainable for significant investors. Banking, financial services, and the legal profession are receptive toward attracting foreign business.

Once ratified and implemented, the U.S.-Panama TPA Panama would accord substantial market access across its entire services regimes, subject to very few exceptions, using a "negative list" approach. Under the TPA, Panama agreed to dismantle significant services and investment barriers, such as lifting restrictions on investment in retail trade, ensuring access to contracts related to the Panama Canal, and providing new access in professional services that previously had been reserved exclusively to Panamanian nationals. This would allow U.S. firms to take full advantage of the benefits of the TPA across all sectors, including, but not limited to express delivery, logistics, energy, audiovisual, computer, construction, wholesaling, health, education, and environmental services. U.S. financial service suppliers have full rights to establish subsidiaries or branches for banks and insurance companies. Portfolio managers in the U.S. would be able to provide portfolio management services to both mutual funds and pension funds in Panama. Even under the TPA, investment by financial services firms would still be restricted. Similarly, while the TPA would accord U.S. telecommunications companies greater access to the Panamanian market (with the exception of mobile services) and provide for greater transparency and enforcement by the regulating agency, telecommunications investments are hampered by the reluctance of Cable & Wireless Panama (one of the four cellular telecommunications companies operating in Panama and principal wire-line carrier) to negotiate and/or implement interconnection agreements with new entrants.

Protection of Property Rights

Mortgages, liens, and other security interests are recognized and registered in the public registry. Much of the information contained in the public registry is available on-line. The public property registry has been expanded and modernized. Unique features of Panamanian law and practice in specific areas (including but not limited to banking, accounting requirements, formation and functioning of corporations, and taxation) make retention of local legal counsel highly advisable.

One-third of real property in Panama is titled and most of the titled property is in Panama City. If property does not have title, a person may have a legal “right of possession” that is certified by a local official. A right of possession allows a person to occupy and eventually obtain title to the property through a judicial process. Due to the obstacles in securing clear title of property and the often local and non-uniform nature of the adjudication of rights of possession, Panamanian and foreign investors are vulnerable to claims against and loss of their purchased right to possession and title to property.

The legal framework for the protection of intellectual property rights (IPR) in Panama has improved significantly in recent years. The government passed an Anti-Monopoly Law in 1996 mandating the creation of commercial courts to hear anti-trust, patent, trademark, and copyright cases exclusively. Two district courts and one superior tribunal began to operate in June 1997 and have been adjudicating intellectual property disputes. In January 2003, the GOP designated an IPR-specific prosecutor with national authority, which has consolidated and simplified prosecution of those cases.

IPR policy and practice in Panama is the responsibility of an “Inter-institutional” Committee. This committee consists of representatives from six government agencies and operates under the leadership of the Ministry of Commerce and Industry. It coordinates enforcement actions and develops strategies to improve compliance with the law including organizing training and public awareness seminars, among other activities. The creation of a specialized prosecutor for intellectual property-related cases has strengthened the protection and enforcement of IPR in Panama. However, given Panama’s role as a transshipment point, industry is concerned Panama will become susceptible to trading in pirated and counterfeit goods.

The TPA provides for improved standards for the protection and enforcement of a broad range of intellectual property rights, which are consistent with U.S. standards of protection and enforcement and with emerging international standards. Such improvements include state-of-the-art protections for digital products such as U.S. software, music, text and videos; stronger protection for U.S. patents, trademarks and test data, including an electronic system for the registration and maintenance of trademarks; and further deterrence of piracy and counterfeiting.

Panama is a member of the World Intellectual Property Organization (WIPO), the Geneva Phonograms Convention, the Brussels Satellite Convention, the Universal Copyright Convention, the Bern Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, and the International Convention for the Protection of Plant Varieties. In addition, Panama was one of the first countries to ratify the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty, although the GOP has yet to introduce implementing legislation to put these treaties fully into force in Panama and to establish new offenses, such as those needed for internet-based copyright violations and to enhance border measures. Under the TPA, Panama would be obligated to ratify or accede to the Patent Cooperation Treaty, the Convention Relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite, and the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure by the date the TPA enters into force. Panama would also be obligated to ratify or accede to the International Convention for the Protection of New Varieties of Plants by 2010 and the Trademark Law Treaty by 2011.

Copyrights

The National Assembly in 1994 passed a comprehensive copyright bill (Law 15), based on a World Intellectual Property Organization model. Law 15 provides copyright protection based on the life of the author plus 50 years. If there are co-authors, the protection is until the death of the last author plus 50 years. Collective works, software and audiovisual works are also covered for 50 years since the date of publication or after the work is finished (with no publication). The law modernizes copyright protection in Panama, provides for payment of royalties, facilitates the prosecution of copyright violators, protects computer software, and makes copyright infringement a felony.

Though Panama’s 1994 copyright law modernized copyright protection and amendments to the law in 2004 provided for a special Copyright Office with anti-piracy enforcement powers, piracy remains a problem. Films in theatrical release are often downloaded to DVDs and videos, reproduced on optical discs, and then distributed by street vendors.

The TPA would require implementation of the WIPO Treaties in a manner consistent with the U.S. digital Millennium Copyright Act. The TPA would also extend copyright protection to life of the author plus 70 years; would require both governments to mandate the use of legal software in government agencies; and would include provisions to protect against the theft of encrypted satellite signals and the manufacturing or sale of tools to steal such signals.

Patents

Panama is a member of the Paris Convention for the Protection of Industrial Property. Panama’s Industrial Property Law (Law 35 of 1996) provides a term of 20 years of patent protection from the date of filing. Law 35 provides specific protection for trade secrets. However, at least one pharmaceutical company has raised the alarm that these protections are not being respected by the office of the Ministry of Health that registers generic medicines, though the Ministry is attempting to address the concerns.

The TPA would address the issues of patent extension for unreasonable approval delay, data exclusivity of material submitted to regulators, and the prevention of patent linkage.

Trademarks

Law 35 provides trademark protection, simplifies the process of registering trademarks and allows for renewal of a trademark for ten-year periods. An important feature of the law is the granting of ex-officio authority to government agencies to conduct investigations and to seize materials suspected of being counterfeited. Decrees 123 of November 1996 and 79 of August 1997 specify the procedures to be followed by Customs and Colon Free Zone (CFZ) officials in conducting investigations and confiscating merchandise. In 1997, the Customs Directorate created a special office for IPR enforcement, followed by a similar office created by the CFZ in 1998. The Trademark Registration Office has undertaken significant modernization with a searchable computerized database of registered trademarks that is open to the public as well as online registration.

The Trademark Registration Office’s website allows applicants to track the status of their Trademark and Patent applications and the creation of a Customer Service Center. The Trademark Registration Office claims to be the most advanced in the region, with 90% automation. This office reports that it has reduced trademark registration processing time in half, down from one year to six months. This office also reports that it has conducted classes on the importance of IPR protection at the Technical University of Panama and recently sponsored a National Inventor's Competition that brought inventors together with prospective investors and customers.

The TPA would broaden the scope of protected trademarks to implement and enforce existing geographic indication protections and provide for increased trademark services automation.

Transparency of Regulatory System

U.S. businesses often are concerned about the responsiveness and transparency of regulating agencies.

Public Utilities and telecommunications industries long complained of slowness of Panama's Regulatory Entity ("Ente Regulador") in responding to competitive concerns or requests for information. In February 2006, the Torrijos administration enacted by "decree law" the elimination of the Ente Regulador and creation of a new "National Public Services Authority." The GOP's aim is to provide more effective oversight by separating administrative and regulatory functions related to water, electricity, and telecommunications providers. The National Public Services Authority’s director has taken steps to resolve regulatory disputes in the electricity and telecommunications sectors. In the banking and finance sector, private entities generally give good marks to the Panamanian entities that regulate them, such as the Superintendent of Banks.

On July 12, 2006, Panama enacted Law 27 which allows the GOP to create enterprises to conduct oil and gas exploration, distribution, production, storing, industrialization, commercialization, importation, exportation and refining activities. This gave rise to concerns that Law 27 is ambiguous and may result in greater government intervention and restrictions on the energy sector. In late 2008, the GOP started to change the rules governing the import and sale of refined petroleum products. Fuel importers did not consider the process to be fair and transparent.

Under the PanamaEmprende program, the creation of a business and obtaining the requisite permits have largely been automated to an online system which before required significant delays and the possibly for corruption.

Efficient Capital Markets and Portfolio Investment

Panama's 1998 Banking Law regulates the country's financial sector. The law, which concentrates regulatory authority in the hands of a powerful and well-financed

Superintendent (http://www.superbancos.gob.pa), transformed the previously inadequate regime into one that approaches international standards. The Bank Superintendent has worked since 2004 toward bringing Panama’s bank supervision up to “Basel II” standards. In July 2006, the Bank Superintendent reported that Panama largely complies with the international standards for effective bank supervision. However, the Superintendent determined that, to fully meet Basel II standards, Panama needs to bolster and modify its regulatory framework for banks in areas such as capital adequacy; liquidity, market risk, and loan and investment portfolio ratings. The GOP is working to make modifications to its banking to comply with more of the standards of Basel II.

Traditional bank lending from the well-developed banking sector is relatively efficient and is the most common source of financing for both domestic and foreign investors, offering the private sector a variety of credit instruments. The free flow of capital is actively supported by the GOP and is viewed as essential to Panama’s large banking sector. Panamanian and foreign investors are treated equally vis-à-vis government policy and law with respect to access to credit. Panamanian interest rates closely follow international rates (i.e., the London Interbank Offered Rate - LIBOR), plus a country-risk premium. However, the global financial crisis has affected rates and curtailed the availability of funds from correspondent banks abroad.

Early in 1999, Panama passed a securities law that established a National Securities Commission to regulate brokers, fund managers, and all matters related to the securities industry. The Commission began to function in early 2000. Some private companies, including multinational corporations, have issued bonds in the local securities market. Companies rarely issue stock on the local market and, when they do, they often try to issue shares with no voting rights. As a result, these stocks are less attractive than those with voting rights. Moreover, investor demand is generally limited because of the small pool of persons, companies, and investors with the resources to invest.

Interest from time deposits and certain bonds are tax-exempt. There is a 10% withholding tax on dividends, although capital gains from the sale of equities listed on the Panamanian exchange is tax exempt. While wealthy Panamanians may hold overlapping interests in various businesses, Post is unaware of any established practice of having cross-shareholding or stable shareholder arrangements, designed to restrict foreign investment through mergers and acquisitions.

There are no restrictions on, nor practical measures to prevent, hostile foreign investor takeovers, nor are there regulatory provisions authorizing limitations on foreign participation or control or other practices to restrict foreign participation. There are no government or private sector rules to prevent foreign participation in industry standards-setting consortia.

Financing for consumers is also relatively open, as mortgages, credit cards and personal loans, even to those earning modest incomes, are widely available on terms similar to those in the U.S.

Political Violence

Panama's Constitution provides for the right of peaceful assembly, and the Government generally respects this right. No authorization is needed for outdoor assembly, although prior notification for administrative purposes is required. Throughout 2008, police showed restraint and professionalism while monitoring protests by retirees, students, political activists, and the teachers’ union.

Political violence in Panama is uncommon, but there are exceptions. During 2007, there were two incidents involving the construction workers union SUNTRACS in which two SUNTRACS workers were killed during protests. Typically, SUNTRACS will protest in front of non-SUNTRACS unionized projects seeking to disrupt construction. It is common for unions, employee associations and unaffiliated groups to attempt to impede traffic and commerce in order to force the government or business to agree to demands.

Corruption

The World Bank's Worldwide Governance Indicators Project reflected that Panama is in the middle range of countries in Control of Corruption, Government Effectiveness and Regulatory Quality. However, Panama lags behind in the Rule of Law index and there is evidence of corruption in all levels of the judicial system. Weak administration and accountability among the branches of government and in rural areas facilitated corruption.

The general perception is that anti-corruption laws are not applied rigorously and that the government enforcement bodies, such as the Comptroller General's and the Attorney General's offices, have lacked effectiveness in pursuing and prosecuting those accused of corruption, particularly in high-profile cases. Constitutional reforms that permit the Supreme Court to decide whether to investigate or indict legislators while in office were implemented on November 15, 2004. However, the Torrijos Administration later backpedaled by signing Law 25 of 2006 which precludes any entity other than the Supreme Court from opening an investigation into corruption allegations involving a sitting legislator.

Panamanian law provides that only the National Assembly may initiate corruption investigations against Supreme Court judges and that only the Supreme Court could initiate investigations against members of the National Assembly, thereby encouraging, in effect, a “non-aggression pact” between these two branches of government. Supreme Court judges are typically nominated to their 10-year terms on the basis of political considerations as opposed to recommendation from civil society.

The GOP has not acted to dismantle Panama's dictatorship-era libel and contempt laws, which often are used to punish whistleblowers, while those accused of acts of corruption are seldom prosecuted and almost never jailed. Panama's government lacks strong systemic checks and balances that incentivize accountability. The lack of a strong professionalized career work force in Panama's public sector also hinders systemic change.

Panama has a wide range of laws, regulations and penalties to combat corruption. Accepting or receiving bribes is illegal and subject to imprisonment. President Martin Torrijos campaigned in 2004 with a promise to eradicate corruption. The government continues to assert its commitments to combating corruption as part of its overall agenda of institutional reform. Nonetheless, allegations of corruption have been endemic for many years and remain common. Complaints by American investors about allegedly corrupt judicial and governmental decisions prejudicial to their interests remain problematic. Nevertheless, other than cases involving drug trafficking and money laundering, GOP officials, judges, and legislators are seldom investigated, much less convicted on corruption charges. In late 2007, press reports of embezzlement by Ministry of Education officials sparked a GOP corruption investigation and a handful of arrests.

While corruption is present in many areas, Panama's Supreme Court has been a particular concern. In March 2005, four Court magistrates hurled accusations of corruption against each other, provoking wide-spread public demands for the dismissal of all nine justices. In response, President Torrijos created a State Justice Commission to recommend improvements to the administration of justice, mainly in the areas of transparency, efficiency, and public accessibility. The Commission released its report in October 2005, but thus far no long term substantial changes have been made. In November 2005, the National Assembly's Judicial Affairs Committee dismissed a complaint filed by NGO Citizens’ Alliance for Justice against eight of the nine magistrates for questionable rulings. Coincidentally, a day later the U.S. Government revoked the visa of Supreme Court magistrate Winston Spadafora under section 212(f) of the Immigration and Nationality Act (regarding public corruption). In January 2008, newly installed Panamanian Supreme Court President Harley Mitchell publicly acknowledged corruption concerns and signaled his intention to address those concerns.

Since taking office in September 2004, the Torrijos Administration took steps toward following through on its "zero tolerance" anti-corruption campaign, including the launch of investigations into the finances of several prominent figures in the Moscoso Administration. The GOP rescinded former President Moscoso's June 2002 decree that impeded enforcement of the January 2002 Transparency Law. Moscoso's decree imposed regulations that hindered access to information on public entities. In addition, President Torrijos established a "National Council for Transparency Against Corruption" that makes recommendations to the President, but the Council's influence on the administration is not strong. Meanwhile, several high- profile cases remain unresolved by the Panamanian courts. The Torrijos Administration also passed a package of fiscal and social security reforms through the National Assembly that included increased transparency measures.

To increase transparency and reduce corruption, the government transferred certain functions to computer-based processes. The government’s internet-based procurement system (PanamaCompra) requires publication of all proposed government purchases on the internet, the evaluation of proposals and monitoring of the procurement process, and advance public notice of intended procurement, including technical specifications and tender documents. An administrative court handles all public contracting disputes. The rulings of this administrative court are subject to review by the Panamanian Supreme Court.

Additionally, commercial or industrial licenses may be obtained through Panama’s online business registration service, PanamaEmprende. This innovation, in which a prospective business owner may register his or her business in 15 minutes, has reduced dramatically the number of opportunities for corruption from the former process which took 60 days and involved numerous interactions with local officials.

In 2005, the “State Pact for Justice,” a commission created by government representatives and civil society members detailed a reform agenda for the years 2005-2009 detailing numerous goals to be met to curtail corruption, including judicial and legal reforms and increased transparency of government information. In September 2008, the Citizens Alliance for Justice, a member of the commission that is also the Panama chapter of Transparency International, reported that 87% of those goals had yet to be met, although work towards achieving them was underway.

Although Panama's overall efforts to combat public corruption have been lackluster, both the Attorney General and Comptroller General (who have primarily responsibility for combating corruption) have worked to improve the transparency of their organizations and pursue public corruption.

Bilateral Investment Agreements

Panama currently has bilateral free trade agreements with El Salvador, Costa Rica, Taiwan (Taiwan’s first such accord), Chile and Singapore. The Government of Panama has concluded negotiations on a free trade agreement with Honduras and Guatemala, which are waiting ratification by their legislatures. Reportedly, Panama and Cuba recently completed negotiations on a partial Free Trade Agreement. It is currently negotiating free trade agreements with Nicaragua, Canada, and the Caribbean Community (CARICOM/14 countries). Panama cooperates with the Secretariat of Central America Integration (SIECA), as a non-voting member, in order to participate in SIECA’s free trade negotiations with the European Union.

The U.S. and Panama began negotiations for a Free Trade Agreement in April 2004. The Agreement (renamed the "Trade Promotion Agreement") was completed in December 2006, signed on June 28, 2007, ratified by the Panamanian Assembly on July 11, 2007, and is pending submission by the President to Congress for ratification. The Torrijos Government is also looking to aggressively deepen its trade integration with Andean and Mercosur countries. Panama has bilateral investment agreements with the United States, the United Kingdom, France, Switzerland, Germany, Taiwan, Canada, Argentina, Spain, Chile, Uruguay, the Czech Republic, Netherlands, Cuba, Mexico, Dominican Republic, and Korea. Panama has also signed bilateral investment agreements with Ukraine, but which has not yet entered into force. On November 5, 2004, Panama announced it would join the now G-4 (Group of Four), formerly the G-3 consisting of Colombia, Venezuela, and Mexico. However, negotiations to formally join the G-4’s commercial framework have not begun.

Panama is a beneficiary of the Caribbean Basin Economic Recovery Act, better known as the Caribbean Basin Initiative (CBI), which provides for one-way free trade access for specific Panamanian exports to the U.S. In 2000, the U.S. Government enacted new legislation (Caribbean Basin Trade Partnership Act) enhancing the CBI program. The new CBI legislation permits more liberal treatment of textile imports from CBI countries. While CBI benefits play a role in Panama’s growing exports on non-traditional fruits, since Panama is not an important textile exporter, the new legislation has limited value for Panama.

Panama has bilateral investment agreements with the United States, the United Kingdom, France, Switzerland, Germany, Taiwan, Canada, Argentina, Spain, Chile, Uruguay, the Czech Republic, Netherlands, Cuba, Mexico, Dominican Republic, Korea and Ukraine. Commerce Ministry officials have said that there have been some exploratory talks toward investment agreements with other countries, but they acknowledge that these discussions have a lower priority than ongoing free trade negotiations. The U.S.-Panama Bilateral Investment Treaty (BIT) entered into force in 1991 (with additional amendments in 2001 to reflect Panama's joining the International Center for the Settlement of Investment Disputes (ICSID)).

If the TPA is implemented, it would supersede the BIT. With some exceptions, the BIT ensures that U.S. investors receive fair, equitable and non-discriminatory treatment and that both parties abide by international law standards such as for expropriation and compensation and free transfers. Under the TPA, the BIT would be suspended after a period of 10 years. Investors will continue to have important investment rights and protections under the investment provisions of the TPA. The TPA would establish a more secure and predictable legal framework for U.S. investors operating in Panama. Under the bilateral TPA, all forms of investment would be protected, including enterprises, debt, concessions, contract and intellectual property. U.S. investors would enjoy, in almost all circumstances, the right to establish, acquire and operate investments in Panama on an equal footing with local investors. Among the rights afforded to U.S. investors are due process protections and the right to receive a fair market value for property in the event of an expropriation. Investor rights would be protected under the bilateral TPA by an effective, impartial procedure for dispute settlement that is fully transparent and open to the public. Submissions to dispute panels and dispute panel hearings would be open to the public, and interested parties would have the opportunity to submit their views.

OPIC and Other Investment Insurance Programs

The United States and Panama signed a comprehensive Overseas Private Investment Corporation (OPIC) agreement in April 2000. OPIC offers both financing and insurance coverage against expropriation, war, revolution, insurrection, and inconvertibility for eligible U.S. investors in Panama. OPIC can insure up to US $200 million per project for U.S. investors, contractors, exporters, and financial institutions. Financing is available for overseas investments that are wholly owned by U.S. companies or that are joint ventures in which the U.S. firm is a participant. Panama is a member of the Multilateral Investment Guarantee Agency (MIGA).

Labor

Panamanian labor law, in requiring the Labor Ministry's permission to dismiss employees for "economic reasons," may act as a legal barrier to a firm wishing to reduce its workforce or repatriate its capital. If a firm is insolvent, the law also gives workers priority over all other non-secured creditors.

According to the GOP figures, Panama's non-indigenous labor force as of August 2007 was approximately 1.4 million. Non-indigenous unemployment officially declined to 5.6% in August 2008 from 6.7% in August 2007. The monthly minimum wage is $310 for firms with ten or less employees and $325 for firms with more than ten employees. Panama, however, suffers from a serious shortage of skilled workers. Despite spending approximately 13% of the central government budget and 5% of GDP on education, approximately half of the students fail their university entrance exam. The lack of skilled labor is of serious concern to both Panamanian and foreign investors. The problem with the lack of skilled Panamanian labor is compounded by the Panamanian law that mandates 90% of an employer’s staff must be Panamanian.

Labor unions hold some political influence in Panamanian society and often protest in order to further their objectives. According to the GOP’s Social Security Office, the construction workers union, SUNTRACS, had 50,320 members as of November 2007. SUNTRACS boast that in addition to such official members it covers almost 200,000 workers in total. SUNTRACS is a radical union that engages in frequent and sometimes violent protests aimed at discrediting the GOP. Although some Panamanians believe SUNTRACS enjoys outside influence and financial support, there has been little or no concrete evidence to support this view.

While the GOP has periodically revised its labor code, including a modest revision in 1995, it remains highly restrictive. Several sectors, including the Panama Canal Authority, the Colon Free Zone, and export processing zones/call centers are covered by their own labor regimes and restrictions on strikes are somewhat more prescriptive than those that generally apply. Employers outside of these areas such as tourism have called for greater flexibility, easier termination of workers, and the elimination of many constraints on productivity-based pay. Employers frequently cite the lack of skilled labor as a constraint to growth. In connection with the Panama Canal expansion and in recognition of the skilled worker shortage, the GOP, through the National Institute for Professional Formation and Training, has embarked on a $55 million worker training program.

Foreign-Trade Zones/Free Ports

Law 25 of 1996 provides for the development of "export processing zones" (EPZ's) as part of an effort to broaden the Panamanian manufacturing sector while promoting investment in former U.S. military bases transferred to Panama. The law also includes specific labor and immigration provisions that are more favorable than the current Panamanian labor code. The government also provides numerous tax incentives to companies that operate in EPZs. Companies, whether Panamanian or foreign, operating in these zones may import inputs duty- free if products assembled in the zones are to be exported. Of the thirteen registered EPZs, most remain small and underdeveloped with only a few tenants. They face difficulties combating Panama's high relative wages, low industrial base, and weak infrastructure, particularly outside the Panama-Colon Corridor. Law 25 also provides for the development of call centers. Of the 39 companies licensed to operate call centers, only 16 have begun operations. The call centers are operated mostly by U.S. companies and employ approximately 10,000 persons. Law 41 of 2004 provides for the development of "Panama Pacific

Special Economic Area" in the former Howard Air Base to encourage investment, specifically regarding logistics, in the area. In 2006, Singapore Technologies Aerospace entered into an arrangement to use the facility to provide aircraft heavy maintenance services. Also in 2006, IP Leather and River Latin-America announced an $18 million investment using the Howard Air Base facilities. London & Regional will invest a minimum of $705 million to develop the former air base.

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